CHINA S SECURITIES AND FUTURES MARKETS

Transcription

1 CHINA S SECURITIES AND FUTURES MARKETS China Securities Regulatory Commission February

2 CONTENTS PART I. OVERVIEW 3 PART II. SECURITIES MARKET 8 I. Securities Offering 8 II. Listing & Trading of Securities 14 III. Listed Companies 18 IV. Securities Intermediaries and Service Providers 24 V. Investors 28 VI.Securities Self-Regulatory Organizations 34 PART III. FUTURES MARKETS 39 I. Market Overview 39 II. Futures Brokerage Companies 41 III.Futures Self-regulatory Organizations 42 PART V. CHINA SECURITIES REGULATORY COMMISSION 51 PART VI. OPENING UP & INTERNATIONAL COOPERATION 55 ANNEX: Contact Information of Relevant Institutions 61 1

3 DIAGRAM LIST Table 1-1 Summary of China s Securities and Futures Markets ( )... 7 Figure 2-1 Summary of Total Capital Raised at the A Shares Market ( ) Table 2-1 Summary of the B Share Market ( ) Figure 2-2 Ratio of Market Capitalization to GDP ( ) 16 Table 2-2 Number of Listed Companies ( ) Figure 2-3 Breakdown of Listed Companies by Share Capital in Figure 2-4 Summary of Raised Capital by H shares ( ) Figure 2-5 Summary of Investment Funds Issuance ( )...30 Figure 2-6 Net Assets Value & Ratio in Tradable Market Capitalization ( ) Figure 2-7 Shanghai Composite Index( ) Figure 2-8 Shenzhen Component Index( ) Figure 3-1 Trading Volume and Turnover of Futures( ) Figure 3-2 Trading Summary of Futures Market in 2006(based on the nature of futures products) Figure 5-1 Organizational Chart of the State Council Figure 5-2 Organizational Chart of the CSRC Table 6-1 List of MOUs Signed by the CSRC with Overseas Authorities(As of December 2006). 59 2

4 PART I. OVERVIEW China s securities and futures markets 1 have been developing since the late 1970s in tandem with the market reforms and the liberalization of national economy. The first joint-stock company in China, Beijing Tianqiao Department Store Co. Ltd., was founded in August The same month also witnessed the incorporation of Shanghai Feilo Acoustics Co. Ltd., the first Chinese company that went public. In December 1990, Shanghai Stock Exchange and Shenzhen Stock Exchange were both established. China s first listed company, Shenzhen Shekou Anda Industry Co. Ltd 2, had its shares listed on the Shenzhen Stock Exchange on December 1, 1990, which marked the inception of A shares 3. From then on, China s securities and futures markets embark on a rapid track for developments. In China s securities market, besides the A shares, there are also B shares 4 which, first introduced in 1991, are accessible to international investors. As of the end of 2006, there were 1,434 listed companies in China, out of which 109 companies issued B shares; a total of 1,265.5 billion shares were issued with an aggregate market capitalization of RMB 8,940.4 billion (among which the capitalization for tradable stocks amounted to RMB 2,500.4 billion); and million securities investment accounts were opened, mostly by retail investors. The Chinese authorities have been encouraging and nurturing the development of institutional investors. The leading institutional players include 104 securities companies, 58 securities investment fund management companies, 52 Qualified Foreign Institutional Investors (QFIIs), a number of insurance companies, corporate annuities and China National Social Security Fund. The offering and trading of stocks and close-end securities investment fund units are all dematerialized and executed in centralized trading and settlement systems. A multi-tier trading market for bonds has taken shape in China including on-exchange bond market, interbank bond market and OTC market. In July 1981, the issuance of T-bonds was resumed in China and six years later, a secondary market for T-bonds was established and thereafter grows rapidly. In the year 2006, the total issuance of bonds reached RMB billion yuan, a significant increase compared with the RMB 4.9 billion yuan in Apart from the T-bonds, there are also other kinds of bonds available, such as corporate bonds, financial bonds, convertible bonds and short-term corporate notes. China s bond markets consist of exchange bond market and interbank bond market. The 1 In this brochure China refers to the Mainland of the People s Republic of China, excluding Hong Kong SAR, Macao SAR and Taiwan region. The terms capital market and securities and futures markets are both used with roughly the same meaning. 2 First quoted as Shenanda A, the company was restructured and renamed as Beidagaoke. 3 Common shares denominated in RMB 4 Domestically listed common shares quoted in US dollars or HK dollars. 3

5 major players in the exchange bond market are non-banking financial institutions, such as insurance companies, securities firms and other small and medium-sized investors. On the other hand, the interbank bond market is dominated by banking financial institutions with minor involvements of non-banking financial institutions. The commercial banks are the leading players by holding over 60% bonds. Currently the interbank bond market is the major marketplace for bonds whereas the exchange bond market is thinly traded. In 2006, the total turnover of two bond markets amounted to RMB trillion (the interbank bond market accounted for RMB 9.97 trillion, roughly 98.45%;and the exchange bond market registered RMB 156 billion, or 1.55%). As of 2006, the outstanding bonds aggregated RMB 9.2 trillion (the treasures accounted for RMB 2.9 trillion, policy-related financial bonds registered RMB 2.5 trillion and central bank notes amounted to RMB 3.2 trillion). Currently there are 1 financial futures exchange, 3 commodity futures exchanges and 183 futures brokerage companies in China. Thirteen futures contracts, mainly on agricultural products (soybean, grain and cotton, etc.) and industrial products (copper, aluminum and fuel oil, PTA, etc.), are traded on the exchanges. In 2006, the futures trading volume reached 449 million lots with the turnover amounting to a record RMB 21 trillion yuan(two-way calculation). Currently, warrants are the only financial derivatives 5 available on China s capital market. More financial derivatives like stock index futures, T-bonds futures and options are expected to emerge as China Financial Futures Exchange, the first of its kind, was founded in September While supporting the steady growth of domestic markets, the Chinese authorities also encourage Chinese enterprises to access international capital markets. In 1993, Tsingtao Brewery became the first Chinese company listed in Hong Kong (H-shares 6 ). As of the end of 2006, 143 domestic companies had issued H-shares and got listed on the international capital markets, raising a total capital of US$ billion. Meanwhile, China s securities market is opening wider to the outside world. International investors have been allowed to invest into China s B shares market since In 2002, foreign institutions were allowed to invest directly into China s A shares market via the Qualified Foreign Institutional Investor (QFII) scheme. Besides, eligible foreign companies can offer and list A shares in China s market since Foreign companies are also allowed to take over Chinese listed companies since Chinese securities service industry has also been opening up gradually in recent years. By the end of 2006, 7 licensed joint venture securities companies and 24 joint venture fund management companies had been licensed. Participation by international investors has 5 In October 1993, T-bonds futures on the Shanghai Stock Exchange were open for public trading. Given the immaturity of the futures market characterized by excessive market manipulation and speculations, the State Council of China ordered the suspension of T-bonds futures in May H-shares are shares issued overseas by the domestically listed Chinese companies. 4

6 helped to promote Chinese capital market, in the meantime brought in long-term funds for the growth of Chinese companies. Plus, advanced investment philosophies and good expertise are accompanied into the market. In terms of legal framework, a number of major laws such as Company Law 7,Securities Law 8 and Securities Investment Fund Law have been passed. Besides, the CSRC, along with other authorities, has issued supplemental regulations, administrative rules, guidelines and codes (e.g. Provisional Regulations on Public Offering and Trading and Measures on the Administration of Futures Exchanges). Chinese capital market is at a critical turning point. Further reforms and developments will unfold in an effort to optimize the market functions, improve infrastructures and enhance efficiency and competitiveness. Since the promulgation of Guidelines on Promoting Reform, Opening Up and Steady Developments of the Capital Market by the State Council (China s Cabinet) in early 2004, a series of key measures have been adopted, such as: the reform on non-tradable shares 9 has been advancing smoothly, which paves way for full-scale market-oriented functioning of infrastructures; controlling shareholders are pressed to disgorge illegal appropriation of funds from listed companies, which facilitates these companies operations and profitability; historical leftover risks in securities industry have been largely dissolved while high-quality securities firms are witnessing dynamic growths; diversified institutional investors have taken shape, which lays a foundation for steady operations of capital market; the legal framework as well as the regulatory enforcement capacities are further enhanced; and market-oriented public offering system is being developed with higher efficiencies. China Securities Regulatory Commission (CSRC) is the competent authority supervising the securities and futures markets in mainland China. In 2007, the CSRC will focus on the following mandates: 1. to keep on promoting the market infrastructures, deepen all kinds of reforms in an effort to solve the structural and mechanism problems, and lay a solid foundation for sound market developments; 2. to facilitate the buildup of multiple market structures. Top-quality large enterprises and fast growing small and medium-sized enterprises are encouraged to go public so that the main board is home to a sufficient number of top companies with higher corporate governance standard and investment values. Growth Enterprise Board (venture market) will 7 The Company Law was released on Dec and took effect on July Its latest amendments were approved on Oct and became effective on Jan. 1, The Securities Law was promulgated on Dec and took effect on July Its latest amendments were approved on Oct and became effective on Jan. 1, Before the reform, the A shares were divided into tradable and non-tradable shares based on their tradability at stock exchanges. The reform is aimed to eliminate such a division for well-functioning market infrastructures and orderly operations. A pilot program was introduced in late April 2005 and followed by a full-swing reform thereafter. 5

7 be established to finance the high-tech, innovative enterprises. The Share Transfer System (STS) will be given more functions in an effort to develop the over-the-counters (OTCs) in China. 3. to perfected market infrastructure and operations. Market-oriented public offering system will be improved to ensure that market itself plays a bigger control role in financings. Trading system will be updated in view of the largely increasing amount of tradable shares. Financial derivatives like stock index futures are to be traded soon in the market to give a full play to price discovery function. 4. to develop the corporate bond market. The regulatory framework and issuance system of bond market will be improved with an increasing portion of corporate bonds in direct financing. Firstly, the issuance of bonds will be more market-oriented. Secondly, the credit rating agencies for bonds are to be nurtured. Securitization such as asset-backed securities is among the priorities. A stronger interlink will be build between exchange bond market and interbank bond market for coordinated growths of capital and monetary markets. 5. to tighten market supervisions. Firstly, the supervision over post-non-tradable share reform listed companies will be focused on information disclosure, market transactions and behaviors of controlling and beneficiary shareholders. Secondly, the risk control indicator system, risk alert system and internal control system in securities firms will be put in place and improved with an emphasis on risk control and compliance of routine operations. Thirdly, supervision over fund management companies will be enhanced for the industry s sound and sustainable growths. Fourthly, supervision over intermediaries like accounting firms will be tightened for authentic and timely information disclosures. As the non-tradable shares reform and consolidation campaign over securities firms are approaching an end, China s capital market has achieved increasing improvements on market infrastructures and systems. Following several years of adjustments, the market has witnessed encouraging developments and a new era for sound and rapid growths is on the horizon. 6

8 Indicator Year No. of domestic listed companies (A,B shares) Table 1-1 Summary of China s Securities and Futures Markets ( ) No. of B share companies No. of H share companies Total shares issued (100 million shares) Tradable shares (100 million shares) Total stock market cap. (RMB 100 million yuan) Market cap. of tradable shares (RMB 100 million yuan) Total stock trading volume (100 million shares) Total stock turnover (RMB 100 million yuan) Shanghai Stock Exchange Composite Index (close price) Shenzhen Stock Exchange Composite Index (close price) Securities accounts (10 thousand) Amount issued of T-bonds (RMB 100 million yuan) Amount issued of enterprise bonds (RMB 100 million yuan) Cash T-bonds turnover (RMB 100 million yuan) Repurchase T-bonds Turnover (RMB 100 million yuan) No. of Securities investment funds Amount issued of securities investment funds (RMB 100 million yuan) Turnover of securities investment funds (RMB 100 million yuan) Futures transaction volume (10000 lot) Futures turnover (RMB 100 million yuan ) s Blanks in the charts represent that data are not available or existing. For the data related to shares, both A shares and B shares are covered

9 PART II. SECURITIES MARKET I. Securities Offering 1. Stocks i. The A share market The A shares refer to the common shares issued by the companies incorporated and registered in Mainland China and traded by domestic entities or retail investors (excluding investors from Taiwan region, Hong Kong and Macau SARs) in Chinese currency. A company applying for a public offering of A shares has to submit its application to the CSRC and meet the requirements stipulated in the Company Law, Securities Law, Provisional Regulations on the Administration of Issuing and Trading of Stocks, and other relevant laws and regulations. An issuer can choose either a public or non-public offering. Below are several kinds of public offering: A public offering of securities to unspecified investors; A public offering of securities to accumulatively more than 200 specified investors; A public offering as prescribed by any law or administrative regulation. Advertising, public inducement or public offerings in any disguised form are forbidden in non-public securities offerings. The public offering of stocks may be used to initiate a joint stock limited company, to make initial public offerings (IPOs) of established companies or follow-on offerings of listed companies. To initiate a joint stock limited company means to establish such a company via public issuance of stocks for financing. The promoter subscribes a significant portion of the shares while the rest are offered to the public. Such a public offering shall meet the following requirements as prescribed in the Company Law as well as other requirements of the CSRC. There shall be no less than 2 but no more than 200 promoters, of whom half or more shall have domiciles in China; The shares subscribed by the promoters shall be no less than 35 % of the total shares. According to Article 13 of the Securities Law, an IPO of a company shall meet the following requirements: - 8 -

10 Have a complete and well-functioning organizational structure; Capable of making profits continuously in a sound financial condition; No record of false financial statements over the past 3 years, no record of other wrongdoings; and Meeting other requirements as prescribed by the CSRC. Listed companies can issue additional shares to the public by placing shares to their existing shareholders (hereinafter referred to rights issue ) or by offering additional shares to the public (hereinafter referred to as follow-on offering ). Both methods should comply with the Article 13 of the Securities Law. The following review and approval procedures are adopted by the CSRC: The issuers are required to make public their application documents after being accepted by the CSRC; The Public Offering Supervision Department of the CSRC conduct preliminary reviews on the application documents; The application documents are subject to the review and examination of the Public Offering Review Committee 11, which comprises both the CSRC staff and external experts. The Review Committee members vote by majority in order to recommend to the CSRC for a public offering; Taking into consideration the recommendation of the Review Committee, the CSRC finally decides whether to approve a public offering or not. The current pricing mechanism for a public offering is a market-oriented one. Developing from the fixed pricing, P/E ratio-based pricing and controlled P/E ratio-based pricing, the Inquiry Pricing System is introduced on a trial basis from 1 January It is in essence a book-building pricing system which generally involves two stages. In the first stage, the issuer and its sponsor propose an initial price band to solicit price offers from institutional investors 12. After receiving the first round of feedback, the issuer and the lead underwriter will adjust the price range and offer it to the institutional investors for a second-round feedback which sets the final price of the offering. As of the end of 2006, listed companies in China had issued a total of billion A shares, raising RMB 1,100 billion yuan in total. For the sake of reform on non-tradable shares, the IPOs and follow-on offerings of shares were suspended between April 2005 and April 2006 and resumed in May 2006 following the initial success of the reform. 71 companies made IPOs in the year 11 The Public Offering Review Committee is now composed of 25 members. Five of them are the CSRC staff and the rest are non-csrc experts. The tenure of a committee member is one year and the consecutive tenure shall be no more than 3 terms. Some of them are full-time members. 12 Here refers to the securities investment fund management companies, securities firms, trust & investment firms, financial companies, insurance companies and QFIIs

11 2006, raising about RMB billion; 2 companies made rights issue, raising RMB 432 million; and another 45 companies made follow-on offerings, raising RMB billion yuan. Figure 2-1 summarizes the capital raised from the A share market in Figure 2-1 Summary of Total Capital Raised at the A Shares Market ( ) RMB 100 mil IPOs rights issues followup offerings convertible bonds Source: the CSRC ii. The B share market The inception of B shares marks the first step of internationalization in China s capital market. Like the A shares, the B shares are also issued by joint-stock companies registered in China and listed on Chinese stock exchanges. The B shares are denominated in Chinese currency, but subscribed and traded in foreign currencies. Since 1992, the B shares have been issued and traded on both Shanghai (in US dollars) and Shenzhen (in HK dollars) Stock Exchanges. Domestic citizens are allowed to trade B shares in foreign currencies from February Therefore, the B share market enables Chinese companies to raise foreign currencies from both Chinese and international investors. In accordance with the Company Law, the Securities Law, the Provisional Regulations on the Administration of Issuing and Trading of Stocks and State Council Rules Regarding the Domestic Listing of Foreign Owned Shares, B share issuers shall meet the following requirements: the capital raised by issuing B shares shall be used in a manner consistent

12 with state industrial policy; to comply with regulations regarding fixed-asset investments; to comply with regulations on foreign investments; the promoters must hold at least 35% of the issued shares at the time when the company is set up; the capital contributions by promoters shall be no less than RMB 150 million yuan; the company must float at least 25% of the company's total shares; in the case of a company's total share capital exceeding RMB 400 million yuan, the public floating requirement may be reduced to no less than 15% of its total shares; Neither (a) any predecessor entity (entities) of which the joint-stock company is a part of; nor (b) any major promoter who is a state-owned enterprise, have committed any significant breaches against laws over the past three years; As of the end of 2006, 109 companies had issued a total of billion B shares, raising RMB billion yuan. 86 of these companies also issued A shares. For more information on the B share market, please refer to Table 2-1. Table 2-1 Summary of the B Share Market ( ) Number of B share companies Market cap. of B share companies (RMB 100 million yuan) Market cap. of tradable B shares (RMB 100 million yuan) Trading volume of B shares (100 million shares) Turnover of B shares (RMB 100 million yuan) Source: Shanghai and Shenzhen Stock Exchanges

13 2. Bonds The issuance of bonds such as T-bonds, financial bonds and corporate bonds are subject to the approval of government authorities other than the CSRC. The issuance of convertible bonds and bonds of securities companies are subject to the approval of the CSRC and shall meet the following requirements. i. Convertible bonds Convertible bonds refer to the corporate bonds which can be converted into shares under certain pre-agreed conditions. The issuance of convertible bonds should meet the requirements for new public offering as prescribed in Article 13 of the Securities Law, plus the following requirements regarding corporate bonds in Article 16: The net asset of a joint stock limited company is no less than RMB 30 million yuan and the net asset of a limited-liability company is no less than RMB 60 million yuan; The accumulated outstanding bonds constitute not more than 40 % of the net assets of a company; The average annual distributable profits over the latest 3 years are sufficient to pay 1-year interests of the bonds; The raised funds are invested in a manner consistent with the state industrial policies; The interest rate of bonds does not exceed the band of interest rates as set by the State Council. The funds raised through public issuance of corporate bonds shall be used for the verified purposes only and shall not be used to cover any deficit or non-production expenditures. ii. Bonds issued by securities companies This type of bonds is issued by securities companies which agree to redeem both principals and interests within a certain period of time. Such bonds can be issued to the public or to qualified investors via private placement. The issuance of bonds by securities companies is subject to the review and approval of the CSRC. Aside from the requirements as prescribed in the Securities Law, the securities company issuing bonds should also comply with the following requirements: The latest un-audited assets shall be no less than RMB 1 billion yuan; The company made profits in the preceding year; All risk control indicators have met the requirements as prescribed by the CSRC;

14 No material violation of laws or wrongdoing has been committed during the past 2 years; The shareholders meetings and the Board of Directors are in sound operation and internal control systems are working effectively with proper business firewalls and internal control technical support; Assets of the company have not been misappropriated by any controlling natural person, legal person, other organization or related party; and Other requirements as prescribed by the CSRC. Securities companies that apply to issue bonds via private placement should comply with not only the requirements specified in the Securities Law, but also the above-mentioned requirements numbered c),d),e),f) and g). Meanwhile, the securities companies should also have latest un-audited net assets of no less than RMB 500 million yuan. Private placement can only be offered to the qualified investors capable of independent analysis and risk control over bond investments, and must meet the following requirements: It is a legal person or investment entity; It can invest on bonds according to related regulations and its articles of association; It has more than RMB 10 million yuan of registered capital and over RMB 20 million yuan of un-audited net assets

15 II. Listing & Trading of Securities 1. Listing of Securities According to Article 39 of the Securities Law, publicly issued stocks, corporate bonds or other securities shall be listed in a stock exchange or other securities marketplaces as approved by the State Council. A listing application shall be filed with a stock exchange for its review and approval. i. Listing of stocks A joint stock limited company applying for a listing of securities shall meet the following requirements: The stocks have been publicly issued upon the approval of the CSRC; Its total share capital shall be no less than RMB 30 million yuan; The publicly issued shares shall exceed 25 % of the total shares; where the total share capital exceeds RMB 400 million yuan, the publicly issued shares shall be no less than 10% thereof; and The company shall commit no material violations of laws or false financial statements over the last three years. A listing agreement shall be signed by an exchange and a listing applicant which mainly covers: the code of conducts requirement on the listed company, listing fees, suspending or terminating the listing, services provided by the exchange, etc. In other words, such an agreement sets forth and governs the relations between the listed company and the exchange. ii. Listing of corporate bonds A company applying for a listing of corporate bonds shall meet the following requirements: The maturity of the corporate bonds shall be more than 1 year; The actual issuance is no less than RMB 50 million yuan; Meeting the issuing requirements. The listing of convertible bonds, in addition to the above requirements, shall meet the requirements for public offering of stocks as well. 2. Trading of Securities market size. As of the end of 2006, the market capitalization of China s stock market reached RMB 8,940.4 billion yuan, equivalent to 44% of China s GDP. The market capitalization for the tradable shares amounted to RMB 2,

16 billion yuan, roughly 12.3% of the GDP (see Figure 2-2). The turnover of exchange-traded bonds registered RMB 1.8 trillion yuan, of which the turnover of T-bonds, corporate bonds and convertible bonds accounted for 92.64%, 5.34% and 2.02% respectively. The turnover of bonds repurchase accounted for more than 89% of the total bond turnover. trading instruments. Currently the following financial instruments are available for trading on the stock exchanges: stocks (both A shares and B shares), bonds (cash T-bonds, T-bonds repo, cash corporate bonds, corporate bonds repo and convertible bonds) 13, securities investment funds (close-ended funds, open-ended funds, ETF, LOF) and warrants, etc. market participants. The major market participants include securities companies, insurance companies, securities investment fund management companies, trust & investment companies, non-financial institutional investors, and retail investors. means of trading. Securities are traded on stock exchanges where an open, centralized and computerized matching method is adopted based on the principle of price precedence and time precedence. Other means of trading include collective bidding and block trading bidding. The block trading can be adopted for large-volume stock transactions (no less than half a million shares for A shares). trading fees. Investors purchase or sell securities through the brokerage of securities companies. The commissions 14 paid to securities companies shall not be higher than 3 of the trading value (but no lower than the total amount of the trading regulatory fee and the charges by the stock exchanges). Furthermore, according to the prevailing taxation law, both buyers and sellers are levied a stamp duty of 1 of the trading value. daily caps on the stock fluctuations. At present, except Specially Treated Shares (shares of listed companies in poor financial or operating conditions that require special treatments) which are subject to the daily price limit of ±5%, all other shares are subject to the daily price limit of ±10%. registration and clearing. The registration and clearing of securities are centralized through China Securities Depository and Clearing Corporation Ltd. (CSDCC). Before trading on a stock exchange, an investor must place all the 13 Bonds at the interbank market include T-bonds, financial bonds, corporate bonds, convertible bonds, short-term corporate notes and international bonds. 14 For any trading value (of A shares or securities investment funds) less than RMB 5 yuan, the minimum commission is RMB 5 yuan. For trading value of less than US$1 or HK$5 (of B shares), the minimum commission is US$1 or HK$

17 securities (fully dematerialized) into an account opened with the CSDCC. Currently, the settlement for A shares is T+1 and the settlement for B shares is T+3. market indices. The commonly cited stock indices include Shanghai Composite Index, Shanghai 50 Index, Shanghai 180 Index, Shenzhen Component Index, Shenzhen Composite Index and SME Index, etc % Figure 2-2 Ratio of Market Capitalization to GDP ( ) market cap./gdp Source: the CSRC market cap.of tradable shares/gdp 3. Delisting of Securities i. delisting of stocks Where a listed company is under any of the following circumstances, the stock exchange shall suspend the listing of its stocks: Where the share capital or shareholding structure of the company changes and thus fails to meet the listing requirements; Where the company fails to publicize its financial statements or contains false information in its statements which may mislead the investors; Where the company has committed any major wrongdoing; Where the company has been operating at a loss for the latest 3 consecutive years; or Under any other circumstance as prescribed in the listing rules of the stock exchange. Where a listed company is under any of the following circumstances, the stock exchange shall terminate the listing of its stocks:

18 Where the total amount of share capital or shareholding structure of the company changes and thus fails to meet the listing requirements, and still unable to meet the listing requirements after the rectification period set by the stock exchange; Where the company fails to publicize its financial statements or contains false information in its statements, and refuses to rectify; Where the company has been operating at a loss for the latest 3 consecutive years and fails to make profits for another year; Where the company is disbanded or is declared bankrupt; or Under any other circumstance as prescribed in the listing rules of the stock exchange. When the stocks of a listed company are de-listed from an exchange, they have to be transferred to a special trading system--share Transfer System (STS). The STS is an independent system where securities companies provide brokerage services for the shares of de-listed joint-stock companies. The first company in STS was quoted on July 16, As of the end of 2006, 59 companies were quoted on STS. ii. de-listing of corporate bonds After the listing, where the bond issuer is under any of the following circumstances, the stock exchange may suspend the listing of its corporate bonds: (1) Where the company has committed any wrongdoing; (2) Where a major change takes place in the company which fails to meet the listing requirements; (3) Where the funds raised through the issuance of corporate bonds are used other than the verified purposes; (4) Where the company fails to fulfill its obligations according to the covenant of corporate bonds; or (5) Where the company has been operating at a loss for the latest 2 consecutive years. Where a company is under any of the circumstances as described in item (1) or (4) of the preceding Article with deemed serious violations, or where a company is under any of the circumstances as described in item (2), (3), or (5) of the preceding Article and fails to rectify within a specified timeframe, or where a company is disbanded or declared bankrupt, the stock exchange shall terminate its listing of corporate bonds

19 III. Listed Companies 1. Domestically-listed Companies i. Overview The domestically-listed companies have been growing rapidly. In 1990 there were only 10 listed companies in China. But by the end of 2006, the number had already reached 1,434, of which 1,293 companies issuing A shares only, 23 companies issuing B shares only, 86 companies issuing both A shares and B shares, and 32 companies issuing both A and H shares (see Table 2-2 and Figure 2-3). The share capital of domestically listed companies is mostly between RMB 100 million and RMB 1 billion yuan, with only 138 listed companies owning more than RMB 1 billion yuan of share capital. Table 2-2 Number of Listed Companies ( ) Issuing A shares only Issuing A and H shares Issuing A and B shares Issuing B shares only Total Source: the CSRC Listed companies are located in different parts of Mainland China and across various industrial sectors (mainly machinery, metallurgy, chemicals, electronics, infrastructure, transportation, energy and finance). As of 2006, the share capitals of all listed companies amounted to billion shares, of which billion shares were tradable, accounting for 27.2%

20 Figure 2-3 Breakdown of Listed Companies by Share Capital in No.of Co Under 100 mil yuan Source: the CSRC mil mil mil mil over 1 bil Shanghai Shenzhen Listed companies are the footstone of Chinese capital market. Their overall quality directly determines market attraction and competitiveness as well as serves as a key link for sustainable growths. In order to raise the overall quality, efforts will be based on maximization of all shareholders interests. Listed companies are urged to improve their corporate governance and management, and to strive for higher creditability, transparency, profitability and sustainability. The overall improvement of corporate operations changes China s capital market into a favorable venue for investments. In recent years, the following measures have been taken targeting common problems in listed companies with desirable outcomes. Structural reforms are made to foster common ground of interests for both controlling and minority shareholders in listed companies; System improvements are also made to facilitate the compliant operations of listed companies; Efforts are made to create favorable external environments for operations of listed companies; Measures are taken to improve the composition of listed companies by adjusting the existing share capital and optimizing incremental share capital;

21 Efforts are also made to establish an all-around multi-level regulatory regime. In general, China s dynamic economic growths and implementations of the above-mentioned measures lead to increasingly favorable environments for listed companies to develop. The listed companies are becoming the industry leaders in Chinese economic growths. ii. Regulatory framework The CSRC s supervisions over listed companies cover information disclosure, corporate governance, related parties transactions, M&A, etc. A geographically-based supervisory system has been adopted in supervising listed companies. The Listed Company Supervision Department of the CSRC shoulders the major responsibilities including rules making, policy studies, regulatory coordination, inspection and supervision of regional bureaus and stock exchanges, etc. A local regulatory bureau is responsible for daily supervision of the listed companies within its jurisdiction. Its major tasks include on-spot inspection, risks detection and disposal, etc. Corporate governance, information disclosure, M&A and refinancing of listed companies are also subject to the routine supervision of local regulatory bureaus. Stock exchanges are the forefront regulators as many important issues in relation to a listed company, such as information disclosure, risk warning, suspension, resumption and termination of listing, are subject to their supervision. a) Information disclosure. The information disclosed by issuers and listed companies shall be authentic, accurate and complete and shall contain no false, misleading statement or major omissions (Article 63, Securities Law). The information disclosed by a listed company can fall into 3 categories: public offering information, periodic reports, and ad hoc reports. The public offering information includes prospectus, stock listing announcement, bonds issuance scheme and bond listing announcement, etc. Periodic reports include annual reports, interim reports and quarterly reports. In the case of a material event, the listed company shall immediately submit an ad hoc report to the CSRC. Such routine reports as notification of shareholders meeting and its decision can also be regarded as ad hoc reports. b) Corporate governance. The Code of Corporate Governance for Listed Companies was issued in January The Code sets forth, among others, the basic principles for corporate governance of listed companies, including:

22 Independent Directors. A listed company shall introduce independent directors to its board of directors. In a domestically listed company, independent directors shall accountant for at least one third of the board. Related party transactions must be endorsed by independent directors. As of the end of 2006, almost all listed companies had introduced independent directors to their boards. Independence of Listed Company. A listed company shall be separate from its controlling shareholders in such matters as human resources, assets and financial affairs and independent in organization, businesses and accounting issues to independently bear risks and obligations. Specialized Committees. The board of directors may establish a strategy committee, an audit committee, a nomination committee, a remuneration committee and an appraisal committee pursuant to the resolutions of shareholders' meetings. The audit committee shall have at least one accounting professional as its independent director. c) Related party transactions 15. Timely information disclosure is required by the CSRC, whereas the transaction value between a listed company and its related natural person exceeds RMB 300,000 ;or the transaction value between a listed company and its related legal person 16 exceeds RMB 3 million yuan and accounts for 0.5% or above of the latest audited net assets of the listed company. The director representing a related party shall withdraw from voting when the board or the shareholders meeting is deliberating and voting on the related party transaction. d) Mergers & Acquisitions. Investors can acquire a listed company by a public offer, agreement-based offer and other legitimate ways. In such an acquisition, the stocks of the target company held by an acquirer cannot be transferred within 12 months following the acquisition. 2. Overseas Listed Companies i. Overview On July 15, 1993, Tsingtao Brewery Co. Ltd. was successfully listed in Hong 15 Related party transaction refers to the issues regarding resources or obligations transfers between a listed company or a subsidiary under its control and its related party. 16 Please refer to Rules on Stock Listing issued by stock exchanges for the definitions of related natural person and related legal person

23 Kong, which marked the first overseas listing by a Chinese enterprise. As of the end of 2006, a total of 143 domestic companies had issued shares overseas, raising US$ billion in total (see Table 2-4). 126 of them were listed only on the Hong Kong Exchanges and Clearing Ltd. (including 47 stocks at GEM); 10 dually-listed in Hong Kong and New York; 4 dually-listed in Hong Kong and London; 1 triply-listed in Hong Kong, New York and London; and 2 solely listed in Singapore. Table 2-5 shows the equity structure of overseas listed companies as of the end of Previously the overseas listed companies were primarily large SOEs that were critical to the national economy. Recently, with the increasing overseas listing of small and medium-sized enterprises (SMEs), particularly privately owned enterprises, these companies have exhibited truly diversified ownership structures and industrial sectors with a higher degree of transparency and compliance. These companies have not only raised a significant amount of capital, but also optimized the capital structure and corporate governance. Figure 2-4 Summary of Raised Capital by H Shares ( ) USD 100 mil raised capitals No.of IPOs Source: the CSRC ii. Requirements for applying to list in overseas main boards Where a domestic enterprise directly or indirectly issues or lists any securities abroad, it is subject to the CSRC s approval according to the Article 238 of Securities Law. After restructuring into joint-stock companies, all state-owned companies, collectively-owned companies and enterprises of other ownership that have met the specific requirements are entitled to apply for overseas listing

24 A listing at overseas main boards shall meet the following requirements: The capital raised shall be used in a manner consistent with the state industrial policy and compliant with regulations regarding fixed-asset investments as well as foreign investment policies; The company must own a net capital of no less than RMB 400 million yuan; with no less than RMB 60 million yuan of post-tax profits. Meanwhile, it shall have great potentials for growth based on reasonable P/E ratio, and the capital raised shall be no less than US$ 50 million; The company has a sound corporate governance and internal control regime, sufficient senior executives with acceptable management skills; The company has reliable foreign exchange resources for dividends distribution

25 IV. Securities Intermediaries and Service Providers 1. Securities Companies 17 Securities companies are the leading intermediaries in China s capital market. By the end of 2006 there were 104 securities companies with roughly 3000 retail outlets nationwide under the supervision of the CSRC, regional regulatory bureaus, stock exchanges, securities association and the securities depository & clearing house. The CSRC s supervisions over securities companies cover their establishment, business scope, capital adequacy, risk control indicators, internal control and clients funds management, etc. The Intermediary Supervision Department of the CSRC shoulders the major responsibilities including rules making, policy studies, regulatory coordination, etc. A local regulatory bureau is responsible for daily supervision of the securities companies (and their branches) registered within its jurisdiction regarding their brokerage, proprietary and asset management businesses. Such matters as corporate governance, internal control, risk disposal plans and senior management are also subject to the routine supervision of local regulatory bureaus. The trading activities of securities companies are directly under the surveillance and supervision of stock exchanges. China Securities Depository and Clearing Corporation Ltd., while providing depository and clearing services to securities firms, is also responsible for controlling risks in these areas. i. Establishment requirements. A securities company shall apply to the CSRC for a license provided that it meets the following requirements: Its major shareholders have the ability to make profits continuously, have a good reputation, and commit no major violation of laws or wrongdoings over the past 3 years with a net asset of no less than RMB 200 million yuan; Its registered capital satisfying the provisions of the Securities Law; Have a sound risk control system as well as an internal control system; and Meeting any other requirement as prescribed by laws and regulations as well as by the CSRC. ii. Business scope. A securities company may undertake some or all of the following businesses upon the approval of the CSRC: (1) Securities brokerage; (2) Securities investment consultation; (3) Financial advising relating to securities trading or securities investment; (4) Underwriting and sponsorship of securities; 17 They are often termed as investment banks in the United States, or merchant banks in the United Kingdom

26 (5) Securities proprietary trading; (6) Securities asset management; and (7) Any other business concerning securities. iii. Registered capital. Where a securities company engages in the business operations as prescribed in the abovementioned item (1), (2) or (3), its registered capital shall be no less than RMB 50 million yuan. Where a securities company engages in any of the business operations as prescribed in item (4), (5), (6) or (7) therein, its bottom-line registered (paid-in) capital shall be RMB 100 million yuan; Where a securities company engages in two or more business operations as prescribed in item (4), (5), (6) or (7), its minimum registered (paid-in) capital shall be 500 million yuan. iv. Risk control indicators. As prescribed by the Securities Law, the CSRC shall formulate provisions on the risk control indicators of a securities company, such as net capital, the ratio between net capital and liabilities, the ratio between net capital and net assets, the ratio between net capital and proprietary trading, underwriting and asset management, the ratio between liabilities and net assets, as well as the ratio between current assets and current liabilities. v. Internal control. A securities company shall establish an internal control system, and build up effective Chinese walls so as to prevent any conflict of interest between the company and its clients or between different clients. It shall segregate its securities operations on brokerage, underwriting, proprietary trading and asset management. vi. Funds of the clients. The clients trading settlement funds of a securities company shall be deposited in a commercial bank and managed through separate accounts under the clients names. A securities company shall by no means incorporate any settlement funds or securities of its clients into its own assets. Meanwhile, any entity or individual is prohibited from misusing the funds or securities of its/his clients in any form. Where a securities company is under bankruptcy or liquidation procedures, the settlement funds or securities of its client shall not be defined as its insolvent assets or liquidation assets. Unless for paying the liabilities of its clients or prescribed by laws, the funds or securities of its clients shall not be sealed up, frozen, deducted or enforced compulsorily. A securities company shall not provide any financing or guaranty for its shareholders or any related person. The CSRC started in the second half of 2004 a campaign to consolidate all securities companies for compliant operations. The campaign is estimated to last for around 2 years and its major tasks include: conducting an in-depth evaluation of corporate